Retailing

Shopping spree

A $5 billion luxury purchase

WHERE else can one buy a zeppelin for $10m? Few other places sell jewelled Mr and Mrs Potato Heads for a mere $8,000 each. Other than Paris Hilton's pad or the queen's Balmoral Castle, where can you be waited on hand-and-foot in marble-floored rooms adorned with Picassos? Neiman Marcus is in every sense exceptional. This week, the super-high-end department-store chain sold its most expensive product—itself—for just over $5 billion. The buyers were two private-equity firms, Texas Pacific (which has also invested in retailers such as Debenhams in Britain and J-Crew in America) and Warburg Pincus.

Neiman Marcus is the latest big-name retailer to be acquired. In the past three months, Kmart has bought Sears Roebuck; Federated Department Stores, owner of Macy's and Bloomingdale's, has bought May Department Stores, owner of Lord & Taylor and Filene's; and Goldner Hawn Johnson & Morrison, another private-equity firm, paid $1.1 billion for the ShopKo chain. On April 29th Saks sold its regional stores, and will focus on its high-end Saks Fifth Avenue brand.

Private-equity firms have only recently regained their appetite for retailing. Blackstone Group, Thomas H. Lee Partners, Kohlberg Kravis Roberts and Bain Capital all bid for Neiman. “Retail is the investment du jour,” says Larry Kaplan of Corporate Solutions Group, an investment bank. Private-equity firms currently have billions of dollars they are eager to spend.

What makes this deal different is that it is not a turnaround or a fixer-upper. Neiman is already in great shape. Last year, through just 37 outlets, it earned profits of $205m, almost double the year before. Sales rose by 14% to $3.55 billion. Although mid-market department stores are at saturation point, the luxury-goods business is thriving. Not only are the rich getting richer, but also the number of rich people is growing. American households with a net worth of over $1m jumped by 33% last year to 8.2m, according to TNS Financial Services. The average annual income of Neiman's shoppers is around $500,000.

This, plus its rapid recent growth, explains Neiman's appeal to investors, who can also expect to profit by borrowing against its cashflow. Stephen Hoch, a professor at Wharton business school, calls Neiman a “cash-generating machine”. But its high price relative to profits requires it to keep growing fast. Ominously, Standard & Poor's, a credit-rating agency, fears that Neiman's growth rate is not sustainable.

Burton “Mr Luxury” Tanksy, Neiman's boss, has been careful not to dilute its brand by growing too fast. He planned to open seven new stores by the end of 2008, which may not be aggressive enough for the new owners. Neiman may now expand overseas, where its brand name already has cachet—a move not without risk.

There are no plans to change the existing management. But top executives at Neiman were recently given “golden parachute” severance deals, in case things do not work out with the new owners. Richard Smith, Neiman's chairman, and his family, with a 12.7% stake in the firm, will get nearly $650m from the sale.

Property may have also played a role in the acquisition. Neiman owns choice real estate in wealthy places such as San Francisco and Houston. Kmart saved itself two years ago by selling off property.

Even so, many observers reckon that Neiman's price was too high. Its new owners must hope that demand for $3,100 Manolo Blahnik alligator pumps, $50,000 Fabergé eggs and $1.5m “his-and-her” bowling centres (lessons from a pro bowler are extra) does not wane too soon.